Featured Author:

Mark Kantrowitz

As a nationally recognized financial aid expert, Mark has been called to testify before Congress about student aid on several occasions.

He has served as a guest columnist for the New York Times and the Huffington Post and has been interviewed regularly by major news outlets, including the Wall Street Journal, USA Today, MSN, CNN, NBC, ABC, CBS, CNBC and more.

Mark is the author of five books, including three about student aid. His most recent book, Secrets to Winning a Scholarship, helps families find and win scholarships. He is also on the editorial board of the Council on Law in Higher Education and the editorial board of the Journal of Student Financial Aid, a member of the board of directors of the National Scholarship Providers Association and a member of the board of trustees of the Center for Excellence in Education.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU) and holds Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU.

Instead of defaulting on the debt, the White House would need to
decide which among the other expenses must be cut. Social Security
benefit payments account for about 20% of spending, Medicare and
Medicaid for about 23%, other mandatory expenses for about 12%, the
military for about 20% and discretionary spending for about 19%. (The
interest on the national debt is about 6% of the budget.)
Discretionary spending mostly includes spending through federal
agencies and departments. The top seven department budgets (Health and
Human Services, Veterans Administration, Education, Housing and Urban
Development, Department of Homeland Security, State and Department of
Justice) represent about half of the total, or about 10% of
spending. The federal government cannot take the Social
Security, Medicare/Medicaid and military budgets off the table and
still cut spending by 40%. Cutting all discretionary spending just
wouldn’t be enough.

In such an environment, spending on student financial aid would almost
certainly be eliminated. Student financial aid is not one of the top
spending priorities according to internal rankings by the Office of
Management and Budget. It isn’t even in the top 10. Effectively this
means that the Federal Pell Grant program and the federal education
loan programs, which together represent more than $150 billion a year,
would be suspended. This would force millions of students to drop out
of college because they could not afford to pay for college without
student aid. This, in turn, would force most colleges to lay off
faculty and staff. Many colleges would have to close. The only
alternative would involve doubling tuition rates, guaranteeing
nationwide tuition riots.

But this is likely to be the least of many problems. A 40% cut in
government spending would plunge the US into a long-term
recession. Poverty would be widespread, especially among senior
citizens, and mortality rates would increase significantly. Economic
growth would stall and millions of jobs would be lost. Money market
accounts would have to “break the buck”, causing significant losses
for investors. If the Federal Reserve were forced to buy massive
quantities of US Treasuries, it would lead to significant
inflation. Defaulting on the debt would also hurt the world economy,
since half of the US national debt is held by foreign investors.

Even if Congress ultimately increases the debt ceiling, the
last-minute nature of the deal will raise the profile of political
risk in evaluating the creditworthiness of US sovereign debt. This
will hurt the US credit rating even if the federal government doesn’t
default on its debt. Practically speaking, that will increase the
federal government’s long-term borrowing costs by raising interest
rates on US Treasuries. Every 1% increase in the interest rates on US
debt will cost the US taxpayers an additional $145 billion a year. It
will also have cascading effects, since interest rates on other debts,
such as private student loans, are indirectly tied to the interest
rates on US Treasuries. The interest rates on US Treasuries are often
treated as a baseline risk-free rate of return in financial transactions.